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Friday, 3 June 2011

Depression

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The Great Depression did not just happen in America, it was born. In the 10’s a sequence of key events and problems led to the fall of America’s economy. These included speculation, depressed farms and industries, wealth distribution, low money supply, no safeguards, overproduction, unemployment, and decline in foreign trade.

Speculation was a way of gambling with short term investments. Speculators bought low stocks, which they thought, would rise in price, and when they sold them they would receive a profit. This was like gambling on the stock market, which seemed to attract thousands of Americans. The stock market boom was very unsteady, because it was based on borrowed money and false optimism. When investors lost confidence, the stock market collapsed, taking them along with it. Depressed farms and industries caused wages to drop and forced employers to lay off their workers. With their low incomes, many farmers and workers could not afford the manufactured goods that the industries have been producing at a fast rate. This underconsumption became a major disadvantage in the economy. Wealth distribution referred to the big gap between rich and poor. The top 5% received 0% of the wealth, which was social inequity. Even though business profits rose in many industries, workers did not receive a fair and equal share of these profits. This forced goods and products to pile up in warehouses across the nation because there were not enough buying consumers due to the fact that they did not have any money. Overproduction was advanced by the use of the assembly line, which increased the efficiency rate and took less time to make the same product. There was too much supply and not enough demand. After the assembly line invention, many companies started laying off workers because of the efficiency rate dramatically increased and intensified. Weaknesses in the American economy also affected the strength of foreign countries. The U.S. acted as a bank for other foreign countries especially with loans. However, when Americans began pumping borrowed money into the stock market, bank funds for loans to other countries emptied out. This caused international trade to slow down because without American loans, other nations had less money to spend on our goods. Another obstacle in the way of international trade was high tariffs [on imported products]. Buying on margin and supply and demand were the two most important causes of the Great Depression, which will be thoroughly explained in the rest of the essay.

Buying on margin involved investors paying only a small fraction of a stock’s dollar value, and borrowing the rest of the money from a stockbroker. So if the stock price continued to rise, the buyer could sell later and pay back what had been borrowed, and in the end accumulate a profit. Stock prices rose so fast that at the end of the decade, some people became rich overnight by buying and selling stocks. But if the stock price started to decline the brokers would call in their margins, which meant they asked the investors to put down more cash, if they couldn’t abide by those directions, then the broker would sell the stock. But soon enough brokers had lent out more than six million dollars in loans, the huge number of people investing in the stock market meant the market was saturated. As a result, brokers began calling in their margins at once, but many investors did not have the money to pay them back so the brokers sold the stocks. Enforced selling pushed prices down further, and noticing the decrease in value the rest of the brokers began selling their stocks in panic. With all this commotion, the crash gained its haste and power. In a few months, the stock market crash starting occurring. The prices of many stocks fell down 75%, which caused millionaires to be in sudden debt. Banks who lent their money to brokers lost it all too, and peoples’ money saved in banks suddenly vanished! The outcome empty banks, bankruptcy, and broke people. Black Tuesday, as it was soon called, led directly to the Great Depression in the 10s.

Supply and demand helped bring about and also lengthen the Great Depression. The American farms and factories produced hefty amounts of goods and products during the prosperity before the Depression. But because people had no money, they stopped buying products, but factories and farms still continued to produce at the same rate. So when the factories and farms realized that no one was buying their goods, they had to decrease the production by laying off hundreds of workers. The unemployed could not be consumers either because they were broke, so factories and farms layed off more and more workers. This continued until 5% of the countries population was unemployed with no money. Thousands lost their jobs and were unable to find new ones causing them to go hungry and become homeless with their poor families.

It is likely for a Depression of this caliber to hit America again because most of the causes listed are still being done today. Investors still buy on margin, there is still speculation taking place, unemployment is rising, economic injustice and social inequity is still true, and overproduction is very common. Many believe that if this country goes into war, a depression is inevitable.

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